NL's fiscal outlook is official: 'Negative'

New London's financial struggles have gotten the attention of a credit rating agency responsible for evaluating its ability to pay off loans on time. Fitch Ratings recently informed the administration that the city's AA- rating for general obligation bonds, which dropped a notch last March, is in peril of sinking further. Fitch now lists New London's rating outlook as negative.

This clear-eyed, dispassionate assessment of the city's financial standing is more evidence (not that more was necessary) that its fiscal problems are real and developed over several years. There still appears to be a sizable faction in the city that wants to dismiss these problems as the wild imaginings of the current administration, the first since the change to the mayoral form of governance. No mere belt tightening, elimination of waste, or making government more efficient - pick your budget cliche - will fix it.

It is primarily a revenue problem, not a spending problem.

"The shortfall in budgeted revenues was the primary driver for the deficit," states the Nov. 12 Fitch report.

With its limited tax base, high density of untaxable public and nonprofit institutions, and limited room for new growth, it is a challenge for this city to raise the revenues necessary for basic services.

The tax increase that did win final approval hardly fixed the problem, but the rating agency saw it as a necessary step, along with budget cuts.

"Management prudently approved a 5.1 percent tax increase ($2.3 million in additional revenues) for fiscal 2013 and budgeted $2 million less in expenditures compared to fiscal 2012 spending to help mitigate the structural imbalance," states the report.

Yet the credit agency remains concerned that the administration is operating without much of a safety net - the unrestricted fund balance, or fiscal cushion, which dropped from $6 million to about $1 million in just a couple of years, according to preliminary audit figures.

To allay its concerns, Fitch received assurances from Mayor Daryl Finizio's office "that further expenditure cuts, including additional staff reductions, can be made if necessary to help maintain balanced operations."

It appears those assurances will now be put to the test. Last week Finance Director Jeffery Smith told the council that revenues are coming in lower than expected, expenses higher, and if that trajectory is unchanged it could lead to a $1.1 million budget shortfall. Mayor Finizio may indeed have to find more reductions to "maintain balanced operations."

Which leads back to the negative outlook. What does the city have to do to avoid a rating downgrade that would raise the cost of borrowing and make it more difficult to restructure debt? A lot.

"The city's historic level of financial flexibility served as a key credit offset to the weak economy. A return to positive operations and meaningful progress in restoring available reserves in the near term is fundamental to maintain the current rating level," concludes the Fitch report.

In other words, it will not be enough to keep the budget in balance, the city has to start rebuilding that reserve fund. With taxpayers still trying to fight the tax increase that was approved; the likelihood of cuts in state aid to municipalities looming as the state legislature deals with its own fiscal problems; and little room for deeper cuts in city spending, it is hard to imagine the path to that destination.

But one year into his four-year term that is the challenge Mayor Finizio faces. It's probably not how he pictured things turning out.